Higher housing costs are looming, no matter who wins the election

The great political TV duel between the incumbent chancellor Angela Merkel and her challenger, Peer Steinbrück, came and went on Sunday night. By all accounts, it broke all records for viewership figures for a German political programme. This sounds mightily impressive, but the truth is, since the challenge was being broadcast on pretty much every channel, there wasn’t much else to watch.

If this political challenge was anything to go by, then we’ve been overstating the issue of galloping housing costs among the critical factors likely to decide the outcome of this election. The format of the TV duel, with four prominent talk-show hosts taking turns to quiz the candidates on matters purportedly closest to the voters’ hearts, may not have been optimal for probing the candidates and their party policies in depth – perhaps there was simply too much ground to cover, and too much scope for grand standing by the two experienced politicians to risk losing viewer’s attention by zoning in too much on any one problem area.

It was nonetheless surprising to note how the question of affordable housing failed to make it on to the agenda at all. To judge by the line of questioning and both Merkel and Steinbrück’sresponses, Germans are far more worried about having their emails and text messages intercepted by the prying American eyes and ears of the NSA, than they are about being squeezed out of house and home by inexorably rising rents.

Perhaps the great party machines – on all sides of the political spectrum - have bought the voters off for the moment with their promises of capping rents and clamping down on other forms of unreasonable landlord behaviour. Still, with only three weeks to go to the elections, we were struck by how ‘affordable housing’ was conspicuous by its absence on the big night.

It may well be the lull before the storm. The TV debate is unlikely to change the outcome of the election.

The bookies are still betting on Merkel at a canter, to team up with either her current coalition partner the liberal FDP party, or – a very outside chance – in a grand coalition with Steinbrück’s social democratic SPD (but without Steinbrück, who having served as Merkel’s finance minister at the outset of the financial crisis, has made it clear he couldn’t stomach repeating the performance).

Sooner, rather than later, the incoming government is going to have to get to grips with Germany’s ambitious plans to reduce residential housing energy consumption by 80% by 2050. As we report in this issue, a new report by the Fraunhofer Institut for Bauphysik and the Technical University in Darmstadt estimates the bill for housing renovation coming down the pike for landlords to comply with the minimum regulations at €2.1 trillion, with a further €1 trillion in specific energy-saving installation costs.

These numbers haven’t been absorbed by the public yet, as it all seems so far away. Yet the study warns of the effects these increased costs will have on particularly lower-earning households, whose costs are expected to rise by up to nearly €2.50 per month, or up to 25% more than they are currently paying. The figures produced by the researchers have been questioned, with energy associations arguing that the study paints too gloomy a picture, and is unnecessarily scaremongering. Nonetheless, clever landlords are already figuring out ways to extract the maximum permissible from their tenants for any technical improvements.

The evidence of landlords biting the bullet and undertaking the first wave of necessary renovations is visible everywhere, particularly in the multi-family housing sector. We don’t expect Germany’s feisty tenants’ associations to sit down and take it on the chin, but the future direction of German residential housing costs in the big cities is writ large, no matter who’s in charge. If the old rule of thumb was a 25% of your income for rental accommodation, for large numbers of Germans – and the increasing numbers of immigrants, particularly Spanish, Italians and Greeks, who are arriving daily – that figure is now closer to 40%.

The capital markets are still digesting the possible emergence of a new housing giant – the combined Deutsche Wohnen/GSW Immobilien colossus – which seems to be meeting with general acceptance. The cartel office have given their official clearance, GSW seems willing to be absorbed into the new enterprise, and shareholders are likely to acquiesce, give or take some small squabbling about this year’s dividend. What will emerge, most likely, is a real housing powerhouse with 106,000 apartments in Berlin alone, or 6.5% of the 1.63 million apartments available for rent in the city.

With the prospect of further rent rises in a city still considered inexpensive by European standards, the logic from the two companies’ perspectives appears unassailable. Deutsche Wohnen, in particular, is unrecognisable from the enterprise that eased itself out of the clutches of previous parent Deutsche Bank barely six years ago. It has proven to be one of the most dynamic housing companies in Germany, steadily adding critical mass and efficiency to its key markets such as Greater Berlin and Dresden. Investment of €600m this year alone has raised rental income by €40m in those markets, on its way to likely full-year figures of €110m, up from last year’s  €68m. With this recent history, it’s no wonder the prospect of buying such a similar business, with such a market footprint in such a metropolis, is so mouth-watering.

Will this lead to a new wave of consolidation in Germany’s listed real estate sector? It’s one of the subjects on which you can listen to several experts at REFIRE’s London Conference on November 12th, where available places are filling up rapidly. We hope to see you there.